Suppose that there is a perpetuity that pays $1,000 per year and that the appropriate discount...

Suppose that there is a perpetuity that pays $1,000 per year and that the appropriate discount rate is 5%.

What is the present value of the perpetuity if the first payment occurs one year from today?
What is the present value of the perpetuity if the first payment occurs today?

Solutions

Expert Solution

a.present value of the perpetuity if the first payment occurs one year from today:

=> payments / discount rate

=>$1,000 / 0.05

=>$20,000.

b.present value of the perpetuity if the first payment occurs today:

payment + ( payments / discount rate)

=>1,000 + (1,000/0.05)

=>1,000 + 20,000

=>21,000.

jeff jeffy answered 1 year ago

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